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Mortgage Crisis Penalty for the Real Wolves of Wall Street Could Top $50 Billion

Philip R. Stein
The real wolves of Wall Street–sixteen of America’s largest banks–could end up shelling out more than $50 billion to secure settlements from the federal government in connection with their alleged roles in the mortgage crisis. Of this amount, up to $15 billion would go directly to affected homeowners in the form of cash payments and/or loan reductions.

Penalties Calculated Against JPMorgan Settlement
As first reported by The New York Times, industry insiders are using JPMorgan Chase’s record $13 billion settlement as a benchmark to gauge each individual bank’s potential liability. Specifically, analysts calculated the amount of JPMorgan’s settlement payment as a percentage of the total amount of residential mortgage securities issued by the bank between 2005 and 2008. That percentage was then used to determine how much each of the other banks might have to pay to buy peace from federal investigators.

At the top of the list is Bank of America, the country’s second-largest lender and owner of beleaguered subprime lender, Countrywide Financial, with $11.7 billion in penalties and an additional $5 billion in direct payments to affected homeowners. Morgan Stanley could face a $3 billion settlement figure, while Goldman Sachs’s liability could reach $3.4 billion. Across the pond, Britain’s Royal Bank of Scotland could be saddled with a $10 billion settlement–something that may be hard for the British government to swallow given that it owns a majority stake in the bank.

Big Banks Eager to Move on
The $50 billion estimate does not include JPMorgan Chase’s $13 billion settlement, meaning that the ultimate tab for the banking industry could well exceed $60 billion. While there is no doubt that this is a large figure (a $50 billion payout equals approximately half of the banks’ total profits for 2012), some analysts believe the settlements would be met with open arms by the nation’s top financial institutions. “Yes, $50 billion is a big number,” Gerard Cassidy of RBC Capital Markets opined, “but it is manageable for the 16 banks, and the industry wants to put this behind them,” effectively closing this troubled chapter of their lives.
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